Under the new EMIR rules, market players using derivatives will be required to clear their trades centrally, at least those for which clearinghouses have put in place clearing platforms such as interest rate swaps and credit default swaps (CDS). However, unlike the current OTC model – for which pension funds put in place Credit Support Annex (CSA) agreements with banks defining the list of financial instruments they will be allowed to post as collaterals – clearinghouses are likely to allow initial margins to be posted as cash only.
Pension funds, which have voiced concerns over the risk of losing their cash instruments if a clearing member – usually a bank – defaults, would rather place their collateral into segregate accounts. While a large majority of pension funds already have segregated accounts with custodian banks, others have yet to put in place such accounts. A number of large custodian banks are currently looking to register as a CSD.
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